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Ericsson Business Review: Is this the toughest job in telecoms?

A population of over one billion. Almost 20 operators battling for dominance. And two hundred thousand new mobile subscribers – added every single day. Regulating the Indian telecoms market is not for the faint-hearted, but in Dr. Rahul Khullar, Chairman of the Telecom Regulatory Authority of India, ICT industry players have found a uniquely dynamic and committed supporter.
http://www.ericsson.com/thecompany/our_publications/ericsson_business_review

Ericsson Business Review: Is this the toughest job in telecoms?

1.
Ericsson Business Review, Issue 1, 2015
this exclusive interview with Dr. Khullar was
conducted at his headquarters in the teeming heart
of New Delhi – a true megacity that exemplifies
the vast possibilities and weighty contradictions
of 21st-century India. With today’s most pressing
ICT issues driving the conversation, Ericsson Busi-
ness Review is honored to present the inimitable
insights of one of the most distinguished – and
outspoken – personalities in global technology
policy.
▶ Dr. Khullar, what do you consider to be the
unique characteristics of the Indian telecoms
market?
It comes down to four things – size, data, pricing
and one big taboo. First of all, there are over a bil-
lion people in India, and the industry is not even
close to capturing the full potential of this enor-
mous market. Teledensity here averages 70 per-
cent, and in rural areas it’s around 45 percent. But
since teledensity actually measures the density of
SIM cards, and given that most people who own
a SIM card usually carry at least one more, we re-
ally have a situation where only about half the
population is today connected.
Secondly, the data revolution in India is just
getting started. We lost a number of years due to
a combination of policy inertia and strategic mis-
takes, and other markets have moved a long way
ahead of us. But I now see device penetration and
network performance, together with more flexi-
ble pricing options, at last increasing to a level
that will spur huge pickup of data. At the same
time, the market reality is such that any operator
who tries to fleece people with high data prices
just won’t make it. And this brings me to the third
characteristic, which is that prices in India will
remain low. Even if there may be some room for
price hikes, since realizations are well below head-
line tariffs, operators in India will have to devise
mechanisms to achieve the margins to which op-
erators elsewhere might aspire. They are going to
have to ride on volume – at least in the short term.
The other key aspect of the Indian market is
something that, until recently, nobody really
wanted to talk about. The simple fact is that there
will be a major shakeout in the telecoms business
at some point – and that point is moving closer
every day. For too long, public-policy perception
has been dominated by an extreme view that any
competition is good competition and that if In-
dia has 20 operators, so much the better. People
are slowly starting to wake up and understand
that if our Hirchman-Herfindahl Index score –
an indicator of the amount of competition with-
in an industry – is totally out of step with the rest
of the world, then we need to do some serious
thinking. After all, most countries do just fine with
three or four operators, and nobody there com-
plains about the lack of competition.
A population of over one billion. Almost 20 operators battling for dominance.
And two hundred thousand new mobile subscribers – addedeverysingleday.
Regulating the Indian telecoms market is not for the faint-hearted, but in Dr.
Rahul Khullar, Chairman of the Telecom Regulatory Authority of India, ICT
industry players have found a uniquely dynamic and committed supporter.
▶
“It’s more
important than
ever that
regulators keep
their ear to the
ground and have
a clear sense of
the reality
around them”
Is this the toughest
job in telecoms?

2.
When this consolidation finally takes place,
there will be two immediate consequences. Spec-
trum availability will increase and fragmentation
will decrease, since there will be a greater amount
of spectrum with a smaller number of operators.
Secondly, there should be a positive impact on
margins. Overall, I think the result will be a mar-
ketplace that is a much cleaner, neater place to
operate.
▶ The Indian government has set some very
ambitious targets for coverage. Do you believe
that aiming for 100 percent coverage all in one
go is the correct approach?
Let’s separate two very different issues here. On
the one hand, it is simply unacceptable that even
after 20 years of the mobile revolution, there are
50,000 villages in this country where nobody can
pick up a telephone and make a call. That is a huge
problem in its own right and it has to be fixed. The
Authority has done a fair bit of work on this and
the government is now acting on our recommen-
dations. I have no issue whatsoever with setting
ambitious targets here – this project needs to be
done quickly and we must find the money to do it.
But broadband is an entirely different kettle of
fish, and the dimensions of this problem have not
yet been fully taken on board. When it comes to
broadband, infrastructure can only be one compo-
nent of a wider program – you can never fully
bridge the digital divide just by laying fiber. As a
citizen, what am I going to do with it? I can’t afford
a PC or tablet – and even if I could, what am I go-
ing to get on it and how will it make my life better?
We seem to have lost sight of this in a mad rush to
put fiber infrastructure in place as fast as possible.
It’s the applications and services that ultimate-
ly matter. These should be both relevant and ac-
cessible – which is a huge task from a linguistic
point alone, given that India has more than 20 of-
ficial languages and even more dialects. And for
me, there’s no doubt that principal actors need to
be co-opted in a much more systematic way if any
of this is going to work, both from an infrastruc-
ture and a content perspective.
I’m not talking only about the telecom opera-
tors, but a much larger swathe of industry. But
let’s start with the operators. Why not start a di-
alog with them and say: look, we’re laying fiber
up to a point, why don’t you contribute and hook
up this village on your own? And if one of your
peers does the same with the next village, surely
you can reach a commercial agreement to access
each other’s networks? Everybody wins – the net-
works remain yours, the government crosses two
more villages off the list and the social objective
is achieved.
Even more importantly, once the fiber is avail-
able, the operator then starts thinking about how
to make money from it. That naturally leads to an
increased interest in providing services that will
attract customers and offer a return on invest-
ment. This opens the doors for application devel-
opers and IT players – suddenly, you have a broad-
band ecosystem that might actually be useful to
people’s lives. And speaking of the IT industry –
in which India has enormous strengths – I can-
not understand why it is still not being co-opted
properly. These companies devise world-beating,
completely customized solutions every day. So the
very least we can do is ask them how to approach
a problem like e-health or e-education in 29 states
with differing levels of development.
So your question breaks down into two com-
ponents, and I have no doubt that the first is much
more important. The second, however, requires
a lot more homework and thinking. In general, I
think we need to be pragmatic in terms of targets,
because otherwise we’re just setting ourselves up
for failure. For me, it is better to set more reason-
able targets, rather than aim too high, never get
there and breed only despondency.
▶ What is your assessment of the Indian spec-
trum situation today?
It’s important to emphasize that pricing any as-
set is very difficult, and there’s always a real risk
of making mistakes. I take no delight in being
Ericsson Business Review, Issue 1, 2015
▶
▶
TRAI
“You can never
fully bridge the
digital divide just
by laying fiber”

3.
asked to do this job. As an Authority, we have
made a great effort in recent years to bring meth-
od to the madness and to base things on some
kind of logic. A sceptic may counter that the pol-
icy system is simply operating at a lower level of
craziness today than in the past. But I am con-
vinced that we have been fairly successful in
introducing a better degree of order and sense.
We have been very clear in our recommenda-
tions and public articulation, and I believe that,
by and large, the industry understands how we
think and the way we determine valuations. They
trust us not to do anything arbitrary. When we
have recommended certain prices, nobody has
got up and complained that the figures are unrea-
sonable. The auctions in early 2014 basically fol-
lowed our recommendations, and there were at
least 10 areas of spectrum where the market
cleared at the floor price or higher, which in a
sense means we got the baseline right.
That said, setting the reserve price correctly is
just part of the equation. You must combine it
with a matching supply of spectrum, with suffi-
cient back-up in a range of bands, in order to stand
a chance of seeing true price discovery. And this
is a big challenge in India, which has such tight
controls on supply. If we could ease up on the sup-
ply, there would be very few takers if prices were
unrealistic. But this is where the political imper-
atives come into play. As a regulator, there is al-
ways a trade-off between meeting the govern-
ment’s fiscal demands and helping the industry
to grow, and you have to find a way of balancing
both considerations.
However, I think a recognition is slowly taking
hold that you cannot treat the telecoms sector like
a milch cow forever. If you never give operators
sufficient margins then eventually the investment
will stop, and at that point your Digital India vi-
sion will really go up in smoke.
▶Does it make sense to assign spectrum bands
to specific technologies?
No. The Authority has been technology-agnostic
in terms of spectrum bands for at least five years.
But we need to understand that wider awareness
levels are often very different, and that this can
have unexpected consequences. For example, the
1800MHz band was previously used for 2G, and
just the other day I saw a newspaper article refer-
ring to this as 2G spectrum. This can be a poten-
tial problem when somebody wants to buy this
band for use with another technology, because
the perception can feed into pricing expectations.
The fact that one particular technology was once
deployed on this spectrum cannot be the founda-
tion for pricing it when assigned to another tech-
nology.
Technology agnosticism, though, is no excuse
for technology ignorance. It’s more important
than ever that regulators keep their ear to the
ground and have a clear sense of the reality and
the trends around them. You can’t really do much
more than that. In an industry that changes vir-
tually every day, how can we know what will hap-
pen three years from now? Anybody who claims
they can predict the shape of the telecoms land-
scape in 10 years is probably having a pipedream
– and I include most of the current discussions
around 5G in that. All you can do is think two to
three years ahead, stay aware of the developments
and factor them into your decision-making as best
as you can. But whatever you do, please don’t tie
spectrum to a particular technology.
▶The current telecoms industry debt is around
INR 2 trillion. A recent report from Crisil states
that operators need to increase average reve-
nue per minute (ARPM) by 5 paise just to ser-
vice incremental debt – all in a highly compet-
itive market. Is this a sustainable model?
I do not believe this is a sustainable model at
all. It’s partly a product of spectrum auctions, but
also of cumulative investment decisions relating
to tower companies and asset acquisitions, to give
just two examples. There is a definite industry
movement to offload some of this debt, but it’s
too early to say how things will pan out. It could
also be a problem for the banking sector. Suppose
a bank lends an operator money to purchase spec-
trum – what is the collateral? Spectrum is not only
something intangible, but the operator has mere-
ly bought the rights from the government to use
it for a certain period of time. So there’s a distinct
danger of the number of non-performing assets
on the banks’ balance sheets mounting dramati-
cally over the next two to three years as the in-
dustry shakeout starts to take hold. My hope is
that the transition is not too disruptive, but as a
regulator, there’s only so much we can do to ad-
dress this particular situation.
▶Do you think measures such as ARPM or av-
erage revenue per user (ARPU) are still rele-
vant quantifiers of operator performance?
I am actually quite comfortable with ARPU or
ARPM as measurement tools, and have no prob-
lem with their continued use by the industry. Eve-
rybodyunderstandsthem,whetherthey’reinWash-
ington or Mumbai. Where I do have a problem is
the prospect of transitioning to something else –
whatever that might be – too quickly. If there is re-
ally a need for change, pre-announce it a long way
in advance so that everybody has time to get used
to the idea. The Indian government recently
changed the basis for calculating GDP, and the re-
sulthasbeenconfoundingchaos.Whatshouldhave
beenamanagedtransitionhasbeencompletelyun-
managed, and these statistics are not viewed as
credible. Now if that can happen to something like
national income statistics, imagine if you were to
do something radical for a business like telecoms.
▶
▶
▶Dr. Rahul Khullar joined theTelecom
Regulatory Authority of India as Chairman
in May 2012. Prior to joining the
Authority, he was Commerce Secretary in
the Ministry of Commerce & Industry,
Government of India. A permanent civil
servant who joined the Indian
Administrative Service in 1975, he has
served in various capacities in the Central
and State Government, including
Secretary in the Department of
Disinvestment at the Ministry of Finance,
Director in the Prime Minister’s Office and
Private Secretary to the Finance Minister.
He was also Development Commissioner
for Delhi, Commissioner of SalesTax,
Delhi, and Principal Secretary (Planning),
Delhi.
Dr. Khullar was Chief Negotiator for India
in the Doha Round of multilateral trade
negotiations at theWorldTrade
Organization, and for the free trade
agreement with the European Union.
He worked as a professional economist
in the Asian Development Bank (ADB) in
Manila, the Philippines, between 1994
and 2000, where he was successively
Lead Economist for the Pacific, Philippines
and Central Asia. He also served as Senior
Economist in the Strategy and Policy
Office attached to the President of the
ADB.
He has a PhD in Economics and
has been aVisiting Professor in the
Department of Economics, Boston
University (1990-91), and a Lecturer at
the Kennedy School of Government,
Harvard University (1982-84), both in
the US.
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